What is a Contingency Contract and Should I Use One?

theproagentHome Buying Tips

What is a contingency contract? A contingency contract is commonly used in real estate to protect a buyer from being legally encumbered with a house. If the contingencies set out in the agreement aren’t met by a specific date, this means the buyer can pull out of the deal. Sellers may also have contingencies that they need to fulfill for the sale to go unconditional.

Usually, though, it’s the buyer who will have at least one or two contingencies that they need to work through. While you may want to load up with contingencies to protect yourself, be aware that it may not get you the house you are bidding on. From the seller’s point of view, a real estate contingency contract with a few or no contingencies will be a lot more attractive to close the sale.

Here are four typical contingencies that you’ll find included in a home purchase contract.

1. Finance contingency

Not surprisingly, finance is an essential factor in the sale of a house. If you see a home you like but haven’t yet applied for a loan, then a finance contingency will need to be added to the contract. A buyer usually has a limited number of days to apply for a loan, and get finance approved after the agreement is accepted. If this contingency isn’t met, then there will be no sale.

Getting pre-approved for a loan before you make an offer puts you in a stronger position to negotiate on price.

2. Appraisal contingency

Banks don’t want to lend you more money than the property is worth, so they’ll order an appraisal of the property. It’s wise for a buyer to add a contingency to state that the property must appraise for at least the purchase price. Appraisal contingency means if the appraisal comes in lower than the purchase price, the seller will have to lower the purchase price or you can walk away.

3. Home inspection contingency

Purchasing a home is expensive, so you want to make sure you’re not buying a lemon. It’s a good idea to add a home inspection contingency to the contract if it’s an older home, but in most cases, you should always get one done.

If you neglect to do this and find out afterward it needs significant repairs then the cost is on you. But a home inspection gives you leverage to ask the seller to make the repairs, renegotiate the price or walk away. A home inspection contingency will generally need to be completed by a specific date. If that time expires, then it becomes void.

4. Sale of home contingency

Often buyers need to sell before they can purchase because the money for the deposit is tied up in the current home. A contingency is added to the effect that the deal can’t close until the buyer sells their house by a specific date (usually a couple of months). If the seller signs off on this clause, then the home purchase contract is unconditionally accepted until the sale of the buyer’s home. If the house doesn’t sell, then the deal falls over.

Final thoughts

A contingency contract generally favors the buyer and is a normal part of a real estate purchase agreement. There is usually a deadline enforced with each contingency so that the parties can move forward towards the goal of closing, or to allow them to pull out of the deal. Work with your real estate agent during the offer process to determine the most appropriate contingencies to add to your offer.